Financial chaos prompts European rethink

By Jean Pisani-Ferry

When the architects of the euro started drawing up plans for its creation in the late 1980s, economists warned them that a viable monetary union required more than an independent central bank and a framework for budgetary discipline. Study after study emphasized asymmetries within the future common-currency area, the possible inadequacy of a one-size-fits-all monetary policy, the weakness of adjustment channels in the absence of cross-border labor mobility and the need for some sort of fiscal union involving insurance-type mechanisms to assist countries in trouble.

Beyond economics, many observers noted that EU citizens would accept tight monetary bonds only if they were participating in a shared political community. The former president of the Bundesbank, Hans Tietmeyer, liked to quote a medieval French philosopher, Nicolas Oresme, who wrote that money does not belong to the prince, but to the community. The question was, which political community would support the euro?

Some of these warnings were inspired by deep-seated doubts about European monetary unification. However, others merely wanted to emphasize that Europeans needed a better-equipped and stronger vessel for the journey that they were contemplating. Their message was simple: national governments must make their economies fit for the strictures of monetary union; the euro must be supported by deeper economic integration; and a common currency needs political legitimacy — that is, a polity.

In the end, the leaders at that time — especially German chancellor Helmut Kohl and French president Francois Mitterrand and his successor, Jacques Chirac — set forth to sea in a light vessel. On the economic front, they agreed on only a bare-bones Economic and Monetary Union (EMU) built around monetary rectitude and an unenforceable promise of fiscal discipline. On the political front, they did not agree at all, so the creation of a European polity remained stillborn.

Some at the time, like then-European Commission president Jacques Delors, openly deplored this narrow approach. Though political constraints prevailed, the euro’s architects were, however, not naive. They knew that their brainchild was incomplete, but they assumed that, over time, monetary unification would create momentum for national reforms, further economic integration and some form of political unification. After all, that piecemeal approach was what had helped to build the EU ever since its origins in the coal and steel community of the 1950s. Few among the euro’s proponents expected that there would be no significant change after its launch.

However, this assumption was mistaken. From the signing of the Maastricht Treaty in 1992 to the tenth anniversary of the euro in 2009, the expected momentum for creating a common European polity was nowhere in sight.

Indeed, very few countries have bothered to spell out, let alone implement, a euro-inspired economic reform agenda. Having agreed to delegate responsibility for monetary policy to the European Central Bank, most governments put up fierce resistance to any further transfer of sovereignty. In 2005, a timid attempt to foster political integration by adopting a constitutional treaty was defeated in popular referenda in France and the Netherlands.

So, contrary to expectations, things stayed put. Soon after the introduction of the euro in 1999, it became clear that the scenario favored by the common currency’s architects would not be realized. Everybody accepted — if grudgingly — that the bare-bones EMU was the only game in town.